Northam addresses Senate and House money committees

Joe Fudge / Daily Press

Va. Transportation Secretary Aubrey Layne. At the National Institute of Aerospace in Hampton, Sen. Mark Warner and others held a roundtable about unmanned systems, Air seagoing and undersea drones with local experts advising his what's needed. 4-11-17

Va. Transportation Secretary Aubrey Layne. At the National Institute of Aerospace in Hampton, Sen. Mark Warner and others held a roundtable about unmanned systems, Air seagoing and undersea drones with local experts advising his what's needed. 4-11-17 (Joe Fudge / Daily Press)

What Gov. Ralph Northam called an investment in working families was challenged Friday by House Republicans as a tax increase on the middle class.

The issue is what to do with some $600 million a year of additional revenue Virginia is in line to receive because of last year’s doubling of the federal standard deduction. Northam says he would like to refund any unused portions of a tax credit for low- and moderate-income Virginians that the state now retains.

The money that would make that refund possible – along with other investments in broadband and workforce development that Northam wants to make – comes because the federal standard deduction increases change the math in a decision some Virginians already have to make, Secretary of Finance Aubrey Layne told a special session of the General Assembly’s budget-writing committees.

That decision is whether it is worthwhile to itemize deductions that may total less than the federal standard deduction in order to save on state taxes, since, in Virginia, you can’t itemize on state taxes if you didn’t on the federal form, Layne said.

“There’s not been one change in tax law in Virginia,” he said.

To Northam and Layne, that projected money looks like a windfall that comes to the state even as almost all Virginians see a cut in their total state and federal tax bill.

They think some should be used to help lower-income Virginians, since the federal law changes are heavily weighted to favor the rich and corporations.

To Speaker of the House Kirk Cox, R-Colonial Heights, “it really is a cost shift and a tax increase on the middle class.”

He said House Republicans “really feel like that, with the Trump tax cuts, which we want to see fully implemented, we would like to try to fix that problem in a fiscally responsible way.”

And to Senate Majority Leader Thomas K. “Tommy” Norment, Jr., R-James City County, it all looks like it’s shaping up to be the kind of wedge issue that splits Republicans and Democrats and ends up with no result except talking points for the 2019 legislative elections — even though he believes there are alternatives to help the working poor.

But some of those options — possibly lowering the tax rate on smaller incomes, as the federal law does, or creating a kind of enhanced itemization for the working poor — would be too difficult to deal with in a politically charged General Assembly session in an election year, he said.

The issue of the federal standard deduction windfall was one the General Assembly didn’t talk about much after it was enacted last year.

A proposal by Del. Brenda Pogge, R-Norge, to allow Virginians to itemize deductions on their state forms even if they take the federal standard deduction, was put on ice. House Appropriations Committee Chairman Chris Jones, R-Suffolk, floated the idea of a special session, but none has been called.

But the issue exploded when Northam proposed refunding low- and moderate-income Virginians for the difference between what they owe in state taxes and the earned income tax credit they can qualify for when filing taxes. If a taxpayer gets a tax credit of $1,000 but only owes the state $800, for instance, Northam proposes refunding that Virginian the $200.

This kind of credit exists on the federal level and in 29 other states. The federal government and 24 of those states refund taxpayers for the difference.

To pay out the refunds, Northam wants to use nearly $250 million of an expected jump in tax revenue.

Northam had announced the move to the press last week, and on Friday he made a formal proposal to the joint House and Senate money committees.

After doing that, Northam told reporters that he didn't see this move as a political one with the 2019 state election around the corner. It was, instead, "the right thing for Virginians."

"You know, if you look at the Virginians that have to deal with the federal tax cut, people that earn less than $50,000 are getting the short end of the deal,” he said, “and we’re just trying to put that imbalance back into balance and helping the working class, those folks that need it the most."

Northam called it a "win-win for Virginia," saying a great majority of the rebates would actually go back into Virginia's economy.

“My view is, this is a redistribution of wealth,” mostly funded by a tax increase on Virginians earning between $50,000 and $150,000, said Del. Steve Landes, R-Wyers Cave.

Of the nearly 1.3 million taxpayers in that group, more than 554,000 already take the standard deduction, according to data Layne provided the money committees. That means they’d get the benefit of the federal standard deduction and see no change in their state bills, except what they’d pay if their incomes went up.

On average, taxpayers earning between $50,000 and $150,000 would see a savings of more than $1,500 in federal taxes, if they opted for the higher standard deduction, Layne said. Losing their ability to itemize on state taxes would increase that bill by an average of $115.50, he said.

“I don’t believe the governor has raised one dollar of taxes,” Layne said. “What he said is, there’s a windfall, and he is saying if we haven’t made any changes to our tax law, do we want to keep that and use if for other things or do you want to give it back in other form of tax relief. That’s a policy question.”

Cox said to expect legislation in 2019 on tax reform that would address the middle class, specifically aimed at how things are itemized.

He said the middle class seems to get ignored.

Norment said Virginia could try for a more general tax reform that accomplishes Northam’s goal of helping the working poor, but “just not in the form of a rebate.”

He said he’s not comfortable with simply giving cash, on top of a credit to offset income taxes that would otherwise be paid.

And, while most taxes involve a redistribution, because the burden falls unevenly on different people, as do the public services that taxes finance, Norment said redistribution goes too far when it involves money payments rather than such benefits as food stamps or even the Medicaid expansion that he still opposes.

You can hear more about Senate Majority Leader Norment’s thoughts about tax reform, the budget, the 2019 General Assembly session and the 2019 election on the next Virginia Politics with Ress and Reema, to be released next week. You can hear it at dailypress.com/podcasts or wherever you subscribe to podcasts.

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